03 November 2010

The QE2 is Actually the Titanic

The second round of Quantitative Easement that the U.S. Federal Reserve is implementing is intended to spike inflation by further lowering interest rates by having the Fed buy its own debt. A simple explanation is that the Fed will just be printing money.  By lowering interest rates, the Government can easily add to the Federal Debt to continue financing expensive and expansive social programs, like Obamacare.

Lowering interest rates beyond the already rock bottom current rates will take money out of financial institutions and give the stock markets a quick rush from Uncle Sugar.  But much like a sugar rush, there inevitably is a crash.

The fact that the Fed can not sell its notes on the open market shows that our international creditors (particularly China) is chary about continuing to fund America’s spending spree.  By buying its own notes, the Fed is effectively de-valuing the Dollar.  Expect commodity prices to soon jump in response but financial markets will immediately rise. When the public faces the pinch for consumer purchases, the temptation by the Fed will be to print more money, backed by buying its own bonds.  The danger in this strategy is that when the confidence in the dollar eventually plummets, the markets will tank along with the curse of hyperinflation.  Nobel economist Robert Mundell speculated that there would be a year lag between a sinking dollar and hyper-inflation.

That is why the QE2 is actually the Titanic. I hope that we switch course before the American economy hits the inflationary iceberg just beyond the horizon.

UPDATE 11/01 The Fed announced that it will pump $900 billion into the US economy by printing $600 billion via a QE2 policy and investing $250 to $300 billion through proceeds from earlier investments. And so it begins, and we need not wait for Babylon 5.

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